... ... ... ... Financial Views of Naren ... ... ... ... ...

Awareness of financial issues, especially on the personal front is minimal even among highly educated professionals, including quite a few "Finance Professionals". This blog is intended to be of some value addition to anyone who cares about his/her personal finance. The focus will be on the Indian situation, though the principles will be applicable the world over..... (Please read the disclaimer at the bottom of this page without fail)

Wednesday 24 September 2014

Lies, Damned Lies, Statistics & Media Reports

Take a look at this
amazing graph that I culledout from a not too
old issue of Economic Times, a newspaper that I normally like (and even
respect, as a matter of fact):

﻿

﻿

Needless to add, they
certainly have the usual disclaimer at the bottom. But then, how many folks
would normally bother to take a look at a disclaimer, especially when the
alternative is to just “look at the big picture” and move on!

If we choose to
listen to the logic of the above picture, here are a few thoughts that come to
my mind:

·Kamarajar
hardly went to school, but went on to become a hugely popular and successful
Chief Minister of Tamil Nadu.

oHence,
don’t bother with such mundane things like attending school. You’re likely to
become a Chief Minister without all the effort that goes into passing out of a
good school.

·Bill
Gates dropped out of college and went on to become the riches man on the
planet.

oJust
dump college if you’re dumb enough to be there still..

·Dhirubhai
Ambani started life as a Petrol bunk attendant. And the rest is history.

N

Wednesday 13 August 2014

Being Disciplined

When it comes to
personal finance, people tend to assume that they need to do a whole host of
things and consult a zillion “experts” before they can get on to their “Path to
phenomenal wealth”. They are completely off the mark and totally wrong.

While things are not
altogether simple and absolutely easy so as to be trivialized, they are very
much within the realm of possibility and can be accomplished by virtually each
of you.

The trick is to

Start early

Be disciplined and

Stay put

Of the above three
steps, I would personally regard the second one to be the most critical: Be Disciplined!

Here are some
easy-to-execute tips for being disciplined on the financial front:

Today, identify a time-slot when you will actually sit and start your basic planning process.

Identify a percentage of your regular income which SHALL be saved each month. In the initial years of your career, when financial commitments are typically lower, the percentage can be much higher than, say, when you’re married, have a couple of kids and a couple of loans.

Convert this percentage into a nice, round figure, say, to the nearest thousand or nearest hundred.

Each month, shift this amount AUTOMATICALLY to a separate bank account which will be a “One-way bank account” – This bank account will NEVER be used for routine withdrawals for regular expenses

What you should do
with this “One-way bank account” is the subject matter of a separate blog post,
and will be dealt with in the days and weeks ahead.

For the moment, start
off with the aforementioned “baby steps” to become financially disciplined.
Those of you who are familiar with the Power
of Compounding would
know the likely positive impact due to these “baby steps”. The rest of you may
wish to do a Google search to find out about what Einstein famously referred to
as the “Eighth wonder of the world”. Or, if you so desire, refer to my own blog
post on the Power of Compounding a few years back (Using the Power of Compounding).

N

Monday 11 August 2014

Maximizing Employee's Contribution to PF

To do or Not to
do?

A couple of days
back, a friend told me about his young IITian son’s first job. In the course of
his conversation, he mentioned that he had advised his son to go in for
“maximizing” the “Employee’s contribution to Provident Fund” so as to build an
“automatic savings corpus” right away.

I did proffer my
opinion about the same in brief – that it may not necessarily be a great idea
if the individual concerned happens to be a thrifty individual and has adequate
self-discipline, especially in matters pertaining to personal finances. During
the course of the weekend that followed, I thought further about it. And here
are a few of my thoughts:

Considering the
temptation to blow up one’s “newly acquired monthly inflows”, it is indeed a
good idea to send away a part of the money “automatically” into the savings
pool before it reaches one’s hand. This is certainly true for the vast majority
of youth today. Even more so if the young kid satisfies one (or both) of the
following two conditions:

The monthly income is
just about sufficient for maintaining the chosen life-style of the concerned
individual and / or,

The individual
concerned is likely to yield to the temptation of blowing up all his/her money
as soon as it lands up in the bank!

From anecdotal
evidence, I would guess that at least one of the above two conditions will
apply to well over 95% of people entering the corporate world today. My mom
(and people of her generation) would be tempted to say that the figure ought to
be 99.99% J!

What about the folks
who don’t satisfy even one of the above two conditions? They will be under
immense pressure from their parents, friends, colleagues and perhaps even some
so-called financial experts to maximize the “Employee’s contribution to PF”. The
logic would broadly be as follows:

“You’re earning quite
a bit considering your life-style – Obviously you will be able to save this sum
without even noticing it”

“The power of
compounding works like magic – Before you realize, this contribution would have
grown immensely”

“If you don’t save
this money, you will spend it or lend it or give it or otherwise fritter it
away”

At a superficial
level, the logic is quite appealing. But I’m not convinced. In fact, I would
strongly urge such an individual to ignore the logic and contribute the MINIMUM
possible amount to the “Employee’s quota” of PF Contributions.

Here are a few
reasons:

Being
self-disciplined and financially thrifty, he will in any case save enough of
his money on his own – He doesn’t HAVE TO maximize his contribution to PF.

In any case, the
Provident Fund fetches a ridiculous sub-10% returns on the savings. This doesn’t
in any way cover the real inflation rate that will be applicable to an upper
middle class individual.

More importantly,
considering the long-term horizon for this individual’s savings, he ought to
look at maximizing returns, rather than safety. In fact, the past track record
of the past 10, 20, 30, 40 and 50 years would confirm that returns of
systematic monthly recurring investments equity shares / equity mutual funds
have consistently and significantly outperformed any fixed income products like
Bank deposits, Provident fund, NSC, etc. Hence, risk becomes almost a
non-issue.

The same logic would perhaps hold true for investments in real
estate as well.

Hence, I re-emphasize
my initial point:

“If you’re a disciplined individual, thrifty by nature,
you must MINIMISE your contribution to the Provident Fund”.

From the balance in
this liquid fund, build a corpus of perhaps 3-6 months of monthly expenses (not
monthly income) and park it in a carefully chosen short term debt fund.

Identify your real
insurance requirements (Typically you will require a Term Insurance Plan to
cover your life, a health insurance plan and perhaps an Accident Insurance
plan) – Explore the possibility of taking adequate insurance cover for all
these requirements.

Once this “Emergency
Fund” corpus as well as your Insurance needs are both “ready and done”,
identify 3-5 high quality equity oriented mutual funds and start a Systematic
Investment Plan to invest your routine monthly surplus to these equity oriented
mutual funds.

Stay on the look out
to buy your own home For Living – As and when you
identify a suitable property, you may wish to consider taking a suitable
housing loan and buying that property.

Watch out for the
launch of high quality Real Estate Investment Trust products (REITS). SEBI and
the FM have just approved the concept. I’m sure that reliable and trustworthy
players like HDFC, Tatas, Birlas, TVS Group, SBI, L & T, etc. will very
soon come up with their own REITS. Considering the fact that under the
proposal, long term capital gains from REITs (units which are held for over 12
months) are likely to be completely exempt from Income Tax, REITs are bound to
be hugely popular investment avenues for those who wish to park their funds in
Real Estate for investment purposes. (To put things in perspective, if you sell
a house that you have been living in for the past few years, your capital gains
will be completely taxable, whereas, a corresponding investment in REITs would
be tax-free).

In a nutshell,
remember that unlike your spendthrift friends who blow up their money, you are
disciplined and thrifty. Hence, make the most of it and kill the monster of
inflation with your hard-earned savings. Saving money is just the first step.
The next key step is to convert your savings into investments.

This, I’m sure, will
not only make you immensely wealthy over the next couple of decades, but will
also ensure that you will be able to become financially free by the time you
hit 40.

Sunday 9 February 2014

Why you MUST be overweight in the Financial Sector while
investing ...

Came across a rather
interesting article on how the Financial sector enjoys an undue and highly
exaggerated status, certainly disproportionate to their true contribution to
society (some would be tempted to add - "If any"):

The above article, which is set in a
global context, is a bit "high-funda" and more relevant for those who have a
predisposition to read such esoteric stuff. For the large majority of you, I
would recommend that you simply take a quick and brief glance just enough to get
the general drift of what the article is all about.

What's relevant for us is that

For the same quantum of capital
deployed the financial sector generates much greater revenues vis-a-vis most
other sectors- due to leverage

For the same quantum of capital
deployed / revenues generated, the financial sector generates greater profits
than a good chunk of other sectors

Ditto for the rate of growth of the
firms in the financial sector - For instance, banks which started around a
decade back like Kotak are far bigger today than similar-sized firms which
started off around the same time in other sectors.

Due to systemic risks, more often
than not, the governments around the world will NOT allow financial sector firms
to go bust. They may allow a steel manufacturer or a real estate player or an
automaker to go under - but not banks.

Due to all the above, the ever
increasing proifts of banks accrue to the shareholders, but the downside risks
due to issues like leverage are "sort-of" protected by the governments around
the world.

Hence, while investing in shares, it
may be a good idea to keep a keen eye on financial sector players and be willing
to be significantly overweight in players in the financial sector vis-a-vis the
market as a whole.

The gains will belong to you but not
the losses.

Caveat: The last line above will
obviously depend on your prudence, your entry levels, your fear and greed
levels. But then, that's always true while investing in shares!

Choosing the right Life Insurance
Policy

By now, you'd be clear about whether you need a
Life insurance cover, the quantum required and the company / companies from
which it is OK to buy a life insurance policy.

In this post, I propose to talk about how to identify a suitable life insurance policy...

Some points to note:

As a thumb rule, I dislike combining insurance
and investment. Reason is quite simple - Lack of transparency. And in any case,
once you decide to make an investment, especially for the long term, you would
like to base your decision on factors such as returns, risk, liquidity and
flexibility of shifting to better investment options and/or fund managers from
time to time. Whereas, life insurance products should be bought primarily
(almost exclusively) on the basis of reliability of the actual assurance given
by the life insurance company to honour its commitment to cover the risk of your
life. To combine two such diverse objectives would lead to certain lack of
clarity and perfect confusion.

Hence, if a life insurance policy promises to
return any quantum of money during the life time of the policy holder, be clear
in your mind that they are combining insurance and investment. Such policies
will usually come under the garb and nomenclature of money-back policies,
endowment policies, return of premium policies, Unit-Linked Insurance Policies
(ULIPs), etc.

All such "insurance+investment" policies, in my
opinion, have the potential and high likelihood of turning out to be bad choices
for a vast majority of people. In all such policies, a part of your premium is
used for providing a risk cover. The balance part is used to make investments
and provide you the returns. And in most such policies, you don't know the
break-up of how much of your premium is going to cover the risk and how much is
being invested. The portion which is invested, if invested
in "debt products" such as bank deposits, government or quasi-government bonds,
etc., the returns you get are sub-optimal vis-a-vis what you will get from
making pretty much from the same bank deposits, bonds, etc. The reason: They
have to "manage your money" and hence they incur certain administrative costs -
Such costs are obviously deducted from the returns generated from your
investments. In case of the investment portion being deployed in equity
products, you are "stuck" for a really long time with that fund management
house. If you were to invest the same directly, you will deploy the same in
mutual funds which can be sold off if you find the fund performance inadequate
or if other better options are available.

Hence, in a nutshell, when you are covering your
life, make sure that you do just that and nothing more. Go in for a very simple,
easy to understand, "no return of money till you die" kind of life insurance
policy. They are typically categorised as "Term Insurance
Policies".

The concept of term insurance policy is very
direct and simple: They take your premium and provide a risk cover. During the
term of the policy, if something untoward were to happen and if the
policy-holder dies, the insured amount as per the policy is paid to the nominee.
If the policy holder were to remain alive at the end of the term of the policy,
he/she can simply be happy that he/she is still around to crib about all those
premium payments "going waste". He/she gets nothing in return. To understand
this in a proper context, it is similar to insuring your car / two-wheeler. In
case your vehicle gets involved in an accident, you can claim the amount lost
from the insurance cover subject to the policy amount. If your vehicle does not
get involved in any accident, most rational human beings don't feel sad or
disheartened by it. On the contrary!

Now that you've hopefully decided to go in for a
"Pure Term Insurance Policy", you are free to choose virtually any term
insurance policy from those that are offered by the life insurance companies
that you have shortlisted. A good and sensible option would be to choose the
specific term insurance policy where the premium payment is the least.
Obviously, it is preferable to have a policy which provides a cover for the
maximum duration of time (ideally till the very end of your life on this
planet).

In this context, you must seriously consider the
relatively recent development of "Online Term Insurance Policies". These
policies often provide an insurance cover at much lower premium vis-a-vis
traditional Term Insurance Policies. This is because they are offered directly
by the insurance company and a vast majority of the process is being done online
and hence at a much lower cost. This elimination of middlemen (the insurance
broker, insurance agent, etc.) and the reduction in process costs is passed on
to you by way of a lower insurance premium.

Hence, my vote will be to go in for an
appropriate Online Term Insurance Policy. Go for it. Go for it
TODAY!

Caveat:

All that I've stated above happens to be quite
valid - no conditions apply. However, it is imperative to remember the
following:

Once you decide that you need a life insurance
cover, it is better to have ANY LIFE INSURANCE POLICY than to have NO LIFE
INSURANCE POLICY.

Hence, it is actually better to have one of
those sub-optimal policies that I've described than to have NO LIFE INSURANCE
POLICY.

The much desired Online Term Insurance Policy
that you have identified must obviously be bought. But if you are under
compulsion to buy some other policy from a friend / relative / spouse's relative
/ classmate, etc., it is actually better to buy such a policy from such a source
than NOT to have any life insurance cover. If possible, minimise the latter and
go in for a good quality term insurance policy over and above the sub-optimal
policy.

In any case, if you already have one or more of
those sub-optimal insurance policies (the baggage of history), DO NOT
discontinue such policy / policies till at least three months AFTER you have
received the policy papers from your carefully chosen Online Term Insurance
Policy.

Critical words of wisdom:

You need to remember that the sole purpose of
making premium payments for a life insurance policy is to ensure that you do
have a life cover. You do not wish to be in a situation where after the demise
of the policy-holder, the nominee fails to get the insured amount due to some
fault while filling up the form or due to some intentional/inadvertent false
declaration while filling up the form. Hence, while taking such a life insurance
policy, make sure that you are very meticulous when it comes to filling up the
proposal form. Ideally, you MUST fill it up all by yourself. Even if an agent
were to fill it up, you must ensure that every single item in the form is filled
up accurately and truthfully.

Especially, you must be very particular about
the spellings of your name and that of your nominee. There must be NO MISTAKE in
such basic details such as postal address, contact numbers, email addresses,
nominee details, details of the chosen policy (including sub-options that may be
applicable), Date of birth, etc.

And, having a medical check-up done by the
insurance company's team of doctors is actually an ideal situation. Once that's
done, they will not be in a position to reject a claim later claiming that the
policy-holder did not declare his/her true medical
condition.

In my next few posts, I plan to write about health
insurance policies.

Watch this space!

Regards,

N

About the Author

The author is Naren, an independent thinker presently based at Chennai, India. Naren has an opinion on a range of issues. Will keep expressing them from time to time for the perusal of the world at large! He loves to receive feedback (Especially positive ones!) This blog will focus on matters pertaining to the wide world of finance, investments, thrift, etc. While reading, he'd like you to enjoy this blog and use its inputs effectively after reading the disclaimer at the bottom!

Member of Personal Finance Blogs of ...

Number of people who have cared to know more about Personal Finance before you ... ... ...

Disclaimer & other points to note

Please note the following points:

(1) Views expressed in this blog, including comments, are entirely personal and not meant as a specific recommendation to a particular individual. On the contrary, it is intended to make the readers think for themselves about the specific point of view that is expressed.

(2) It is based on the perfectly imperfect knowledge and wisdom (or lack of the same) of the author (of the blog or the original author of the content of the specific post), and to that extent, may at times appear to be (or actually be) biased. After all, the author is also human.

(3) The various posts on this blog represent the author's views / thoughts / observations at the time of posting the original entry. If the post is based on an external source, wherever the specific source is known, if something has been noted from another source (newspaper, website, etc.), the author of this blog will acknowledge the origin (and if possible, will also provide a link to the original article, news item, etc. The copyright of such articles, news items, etc. will continue to belong to those who are the original contributors of the same.

(4) The author reserves his right to change his mind from time to time and, as a result, post subsequent blogs which may appear to contradict earlier posts.

(5) He would love to take credit for his ability to either be firm in his convictions or for his ability to be flexible enough to change his opinions from time to time based on experience. Either way, he would love to take credit for the contents of the blog.

(6) And, no debits please! The author loves bouquets, but hates brickbats! This blog is only an expression of opinion and not a recommendation of any kind. The author will not compensate you in any way whatsoever if you ever happen to suffer a loss/inconvenience/damage because of/while making use of information in this blog.

(7) Considering his love to take credit, he would like you to give a clear reference to his blog's link whenever you quote from this blog (preferably in big bold legible fonts, with all due bells and whistles)!

(8) Feel free to challenge, disagree, dispute, question, or otherwise express your dissatisfaction of the contents in the comments section of each blog entry. But the author reserves the right to delete any comment for any reason whatsoever (abusive, profane, rude, or anonymous comments - or even just because he wishes to delete a comment for no reason!) - So keep it polite, please.

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(10) Please remember that Mr. N is likely to have a stake (both a financial stake and a stake of "image") in his views as expressed on this blog. Wherever possible, he will explicitly mention appropriate disclosures. However, it is safe to assume that he does, indeed have a personal interest in the views / thoughts / recommendations expressed by him on this blog.

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